Decentralized finance lending and borrowing platform Sky, formerly Maker, has proposed dropping Wrapped Bitcoin as ecosystem collateral due to concerns that the token is closely tied to Justin Sun.
Sky’s team said in a Sept. 12 post on the protocol’s governance forum that it was giving official notice that it would offboard Wrapped Bitcoin (WBTC) variants on SparkLend, its decentralized non-custodial liquidity protocol.
According to the proposal initiated by the BA-Labs team on Sept. 12, the offboarding will be conducted in several steps over multiple executive votes, with the process expected to start on Sept. 26.
It advised users to close WBTC Legacy Vaults and WBTC positions on SparkLend to avoid liquidation.
SparkLend exposure to WBTC. Source: SparkLend
SparkLend has a current exposure of $73 million in debt collateralized against WBTC, and legacy vaults have $127 million in collateralized debts.
The team cited “recent changes in WBTC ownership and control, likely involving Justin Sun or affiliates,” as reasoning for the offboarding.
It added that this poses “significant counterparty risks based on past track records with other Sun-affiliated products.”
Citing findings about crypto exchange BitGlobal, formerly Bithumb, risk analyst and DAO delegate “monet-supply” wrote it was “highly likely that Justin Sun or affiliates control BitGlobal, with ownership concealed through shell companies and nominee directors.”
This poses a problem because the crypto custodian holding the Bitcoin backing WBTC, BitGo, announced a planned partnership with BitGlobal in August, they added.
“Justin Sun-affiliated stablecoins and custodial products have a significant negative track record and pose elevated counterparty risk,” continued monet-supply, who added:
“Given evidence of concealment and concerns about validity of previous disclosures for Sun affiliated entities and products, we find that legal due diligence would not provide an adequate level of assurance.”
Control of WBTC is expected to be handed over to the new venture led by BitGlobal as early as Oct. 8, 2024, “so we will target to begin derisking collateral exposure by this point in time,” they stated.
Related: BitGo CEO argues wBTC security is unchanged amid concerns
Several alternative strategies for Bitcoin (BTC) collateral were suggested, including alternative BTC-denominated assets to fill the gap.
These could be centralized and decentralized tokenized Bitcoin products such as Coinbase’s cbBTC and Threshold’s tBTC products. Sky and Spark would also investigate Bitcoin staking and restaking products.
There are currently around 152,958 wrapped Bitcoin on Ethereum with a market cap of around $8.8 billion, according to the order book, down 44% from its peak of $15.8 billion in November 2021.
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